Melissa Landry, executive director at Louisiana Lawsuit Abuse Watch recently told the Louisiana Record that she was appalled at details coming to light in a levee breach lawsuit settlement.

“Twelve years after the class-action lawsuit was filed, flood victims are receiving notices of settlement payments as little as $3,” Ms. Landry observed.

She is talking about a federal class-action lawsuit filed against Orleans, East Jefferson and Lake Borgne levee districts. A relatively small pot of money, $17 million must be divided to pay 120,000 claims filed after Hurricane Katrina. It had the effect of making storm survivors confused and angry. And this is understandable.

Furthermore, the settlement might appear that the levee districts have admitted at least partial responsibility for the flooding. However, in a case like this, a settlement is not evidence of wrongdoing. And a judge does not have to believe a plaintiff’s contentions have merit to approve a settlement.

The settlement money came from insurance proceeds resulting from policies the levee districts held on the levees. So naturally, one might wonder why the insurance companies would pay if the claims are not true. Here’s why.

Insurance companies have a risk of being found in bad faith for refusing a bona fide settlement offer within or at policy limits. Explained more simply, if an insurer refuses to pay a settlement they could potentially become liable for the full amount of any future settlement or judgment even if it exceeds their policy limits.

The total damages claimed by the plaintiffs for the levee and floodwall failures designed and built by the US Army Corps of Engineers were many billions of dollars. In this case, the insurers each had the choice to pay a few million or roll the dice and possibly end up bankrupt. If the insureds win, they save the few million each minus the legal expenses of a trial. But if they lose, the insurer could potentially face a possible bad faith judgment for billions of dollars.

It’s not hard to see why a rational insurer would choose to settle. In other words, the insurance companies have no choice.

And in this case of the Orleans, East Jefferson and Lake Borgne levee districts, the settlement is just that, and nothing more.

For more about the settlement, click here.